Papering over the cracks at G20

Analysis By Steve Schifferes Economics reporter, BBC News

Mr Topolanek says Europe should resist US-style spending

A week before the G20 summit is set to begin, a major row has flared up between the US and Europe over how to revive the world economy.

US President Barack Obama has called for all countries to bear the burden of stimulating the world economy.

He said it would be unfair to expect those countries taking extraordinary measures to lift up those that were not.

Meanwhile, the Czech prime minister, Mirek Topolanek, the current holder of the EU presidency, has condemned US economic recovery plans as "a way to hell".

Mr Topolanek, whose government collapsed last night in a Czech parliament vote of no-confidence, said the United States was not taking "the right path".

He attacked the growing US budget deficit and the "Buy America" campaign, saying "all of these steps, these combinations and permanency is the way to hell".

Mr Obama wants Europe to play its part

Meanwhile, UK Prime Minister Gordon Brown, who is hosting the G20 summit, has been trying to patch up the row, arguing that all countries are agreed that they will take "whatever measures are necessary" to boost their economies.

But he has been put on the spot by the governor of the Bank of England, Mervyn King, who has warned that the UK has little room for further fiscal stimulus on its own.

Behind the row

The intellectual case for a big worldwide fiscal stimulus has been put by the normally conservative International Monetary Fund (IMF), which has suggested that countries should spend at least 2% of GDP to boost their economies.

Mr Brown is trying to play honest broker

The idea is that if all work together, there will be spillover effects, so that countries will also gain by being able to sell more exports abroad as well as boosting their economies at home.

This is particularly important for large exporting countries, such as Japan and Germany, which have seen a particularly sharp drop in their economic output.

The IMF says that the overall fiscal stimulus plans could boost world growth in 2009 by between 1% and 3%, with about 1% coming from spillover effects.

G20 LONDON SUMMIT World leaders will meet next month in London to discuss measures to tackle the downturn. See our in-depth guide to the G20 summit. The G20 countries are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom, the US and the EU. Q&A: G20 Summit Lessons of failure: 1933 Summit Your views on the summit

But it is worried that most countries - other than the US and China - are cutting back stimulus packages in 2010, and says that the boost to growth will be much less - perhaps zero - by then.

This may reflect a difference of judgement between the US and Europe as to how long the recession will last.

But so far the economic climate has been rapidly worsening, and signs point to the recession being deeper and longer than previously expected.

Fundamental differences

So the differences in approach to the stimulus reflect long-standing tensions between the US and Europe over public spending and deficits.

While European countries generally spend more than the US on public goods and services, they have been struggling for the last decade to reduce the burden of their government debt , which was a key aspiration particularly in the eurozone.

So they are reluctant to give up those hard-won gains to rescue the US economy, which they argue was the country that caused the crisis in the first place.

And some European countries, especially Germany, are historically very sensitive to the longer-run inflationary implications of higher budget deficits.

While the US is prepared to run a budget deficit of 8.9% of gross domestic product, or GDP, and the UK is likely to reach 11% by 2010, Germany is planning a deficit of just 5% and France 6%.

According to IMF figures, France has among the smallest stimulus plans of any G20 countries, at just 0.7% of GDP.

The blame game

Perhaps it is not surprising that France has been one of the most vocal countries calling for the reform of the world financial system in order to get tougher with the banks.

However, they now appear to be pushing at an open door, with both the US and the UK, the traditional advocates of the free market and light-touch regulation, now conceding the need for tighter regulation.

But while this may prevent the next crisis, it is not a solution for the current one.

Mr Brown may be right that all countries are determined to do what it takes to rescue their own economies.

But the more the idea of coordinated action appears to be a chimera, the less likely it will be that the G20 will produce the confidence-boosting effects on global markets that its organisers are hoping for.